RBA Cuts; Will Fedspeak Turn Dovish?

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Market Drivers June 4, 2019
RBA cuts but does not guide
Powell speaks
Nikkei -0.01% Dax -0.18%
Oil $53/bbl
Gold $1327/oz.

Europe and Asia:
EUR EZ CPI n/a

North America:
USD Fedspeak Powell 9:45

FX was steady in early London trade today with the dollar slightly weaker against the majors but stronger against the yen as risk-off flows abated somewhat.

In Asia session trade the big story was the rate cut by the RBA which lowered the benchmark rate to its lowest ever at 1.25%. The cut was well anticipated by the market and the RBA did not provide any forward guidance to any future rate cuts, thus putting a hawkish tone on the event which helped Aussie rally to within a few pips of the key .7000 level in post news reaction.

In its statement, the RBA noted that “The central scenario remains for the Australian economy to grow by around 2¾ t in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low-income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.”

Overall Mr. Lowe and company are adopting the steady-as-she-goes policy of RBNZ making a single tactical cut to rates rather than suggesting that this will be the start of a new accommodative era. In some ways, the RBA has no choice but to be sparing with its guidance as it is starting from a very low basis on rates and has to be parsimonious with its policy actions. Therefore unless the data grows materially worse it’s unlikely the central bank will move again anytime soon.

However, the fate of the Aussie, as well as the other majors, will likely depend on the direction of the Fed rather than any internal actions. The dollar has been battered badly at the start of the week on the near-universal assumption by the market that the Fed will be forced to cut rates no later than September of this year as the slowdown in economic conditions will force it to act.

To that end, today’s roster of Fedspeak which starts with Chairman Powell at 13:45 at the Chicago Fed will be watched very closely by currency traders. Mr. Powell has been loathe to admit any need for accommodation simply arguing for a pause in the tightening cycle. If he continues to adhere to that theme, the dollar could see a pop especially if US 10Y yields move toward 2.15% level. But at the same time, Chairman Powell risks triggering a selloff in equities which are already fragile given the trade tensions affecting the markets. Any particularly harsh tone that would rule out any accommodation for the foreseeable future could send stocks reeling and take USDJPY towards a retest of the lows at the start of the year near the 107.65 level.

Boris Schlossberg
Managing Director

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